Hidden Truths: Recent Episodes
Hidden Truths
Get expert insights on the economy, inflation, recession and investments from two investment professionals.
Listen to Bob Barone answer this question: For quite some time, you have been telling the audience that a Recession has been brewing. Last week we got Retail Sales data and reports from companies like Home Depot and Target. How did these results play into the overall picture of the economy?
Listen to Josh Barone talk about everything EV, including production, politics and when could be the best time to buy an Electric Vehicle.
electricvehicle #financialadvisor
In this episode, Bob Barone, financial expert, shares data that shows that the labor market isn’t as strong as the Fed believes.
In this episode, Eugene Hoover advises how to manage your loans best.
Need help with your investments? Schedule a free discovery call with Eugene today: https://bit.ly/3Df5cIM
Listen to Eugene Hoover give 5 important tips on how to manage your money.
This video is provided by Eugene Hoover of FourStar Wealth Advisors, LLC (“FourStar” or the “Firm”) for general informational purposes only. This information is not considered to be an offer to buy or sell any securities or investments. Investing involves the risk of loss and investors should be prepared to bear potential losses. Investments should only be made after thorough review with your investment advisor, considering all factors including personal goals, needs and risk tolerance. FourStar is a SEC registered investment adviser that maintains a principal place of business in the State of Illinois. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about FourStar’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov
Book a FREE portfolio analysis with Eugene today: https://bit.ly/3Df5cIM
Listen to Josh Barone discuss the large failures, the blocked redemptions, ongoing office absorptions in major cities, and looming maturities.
The CPI came out on Wednesday – it only rose +0.1% in March – that’s down from +0.4% in February and +0.5% in January. Then, on Thursday, Producer Prices fell -0.5%. Listen to Bob Barone's take on the topic.
Need a second option on your investment portfolio? Schedule a free portfolio analysis with Bob here: https://bit.ly/3Df5cIM
Both Fed Chair Powell and Treasury Secretary Yellen view the bank issues both here and in Europe (SVB, Signature Bank, First Republic, Credit Suisse, Deutsche Bank) as one-off events and not symptomatic of stress in the world’s financial system.
The dictionary defines “obtuse” as “annoyingly insensitive or slow to understand.” We can’t think of anything more precise! The Fed and Treasury are “obtuse” when it comes to the issues in the banking system and how they occurred.
Book a free portfolio analysis with an expert here: https://bit.ly/3Df5cIM
Last week, seemingly out of the blue, the financial world was rocked by the failure of Silicon Valley Bank, then Signature Bank, and this week we saw the contagion spread to Europe (Credit Suisse). Listen to Bob Baron shed some light on what’s going on.
**Vanguard Patented Tax Avoidance System is coming to Light!
Listen to Josh Barone shed a light on what it is and how it works.
Need to make sure your money is well invested?
Book a free portfolio analysis with Josh here**.
By last Friday (February 10), with the Fed’s unanimous FOMC view that the future held interest rate increases (plural), and reinforced by the spectacular +517,000 jobs numbers, the markets threw in the towel on their bet that a rate “pause” and subsequent “pivot” to lower rates would occur sooner rather than later and have resigned themselves to at least two more rate hikes in 2023’s first half. At January’s end (blue bars), markets had priced in just one 25 basis point Fed rate hike in March, and then a 25 basis point rate cut late in Q3 followed by another one late in Q4. But, by Friday, February 10, markets changed their view that the hawkish tone of FOMC members was just for show. The gold bars show market views as of Friday, February 10, prior to the CPI release. Clearly, even prior to the CPI release, market views were more in line with the Fed’s December dot-plot, and Powell and FOMC rhetoric.
Listen to the podcast for more.
Schedule a free portfolio analysis!
MANY ARE QUESTIONING WHETHER OR NOT WE WILL HAVE A SOFT LANDING.
Q? The jobs data came in much stronger than markets expected. Pundits are now saying this ensures a “soft landing” for the economy. Do you agree?
The big spike in the Payroll data (+517K) was out of kilter with what has been occurring in the rest of the economy and in other labor market data. Financial markets always shoot first and ask questions later, so on Friday, equity markets fell, and bond yields rose on the fear that the Fed would now have a great excuse to raise interest rates even further than what was already priced in. The far-right-hand sides of the charts show the violent up spikes in the yields of the 10-Yr. and 2-Yr. T-Notes on Friday (February 3).
Listen to the podcast to learn more.
Schedule a FREE portfolio analysis here: https://calendly.com/uva-tanya/15min
ChatGPT is a language generation model developed by OpenAI. It uses a deep learning approach based on the Transformer architecture to generate human-like text responses to a given prompt. ChatGPT is capable of answering questions, carrying out conversations, and even writing short stories, among other tasks. Listen to Josh Barone and Catherine Oaks discuss this incredible technological breakthrough and how it can be used in business.
While the Fed Governors are still talking about raising interest and keeping them there for all of 2023, the financial markets are moving interest rates down. They are no longer doing the bidding of the Fed. Listen to Bob Barone explain what is going on. Listen to the podcast to learn more.
China Socio-Economic Evolution
A. Tiananmen Square
a. 1989 one-million-person protest made up of College Students
b. Tank Man
c. World Outrage
d. Lend to many reforms in China
B. One Child Policy
a. Started in 1979
b. Replaced in 2016 with two Children
c. 2021 allow for three Children plus incentives
d. Birth rate has declined
e. Chart
C. Jack Ma (Policy Shift)
a. Clashed with Chinese Regulators over Banking system
i. Bring ANT public at this time 2022
ii. Last seen in Nov. 2022 in Japan (Where in the world is Jack Ma)
iii. Was Re-Educated
iv. Was recently seen in Thailand
1. Just hours before he gave control company to Daniel Zhang
2. Government is buying Golden Shares
D. Xi Jinping Re-election
a. To win party subport Jinping cracked down on billionaire’s like Ma
b. Re-elected to a 3rd 5 year term (General Secretary) 10/2022
c. Party custom to only allow 2 five year terms
The Wall Street consensus was +203K for Non-Farm Payrolls, but the headline number, at +223K, handily beat that consensus. As a result, the “soft-landing” narrative for the economy is back on the table. The cherry on top was the unexpected low growth in wages (+0.27% to the second decimal). Consensus was +0.4%. Perhaps the much feared “wage-price” spiral isn’t happening! And with those two pieces of data, the equity markets spiked more than 2% on Friday, January 6 (the DJIA rose more than 700 points) and has advanced another 380 points as we record this. One would think that, since the labor market appears to be so strong, this would elicit a further hawkish response from the Fed, and that interest rates would spike higher. But the opposite occurred with the 10-Yr. Treasury yield falling more than 16 basis points (to 3.56% from 3.72% on Thursday) and even short-term rates tumbled significantly (the 2-Yr. Treasury plunged nearly 20 basis points to 4.26% and currently sits at 4.17%). Something appears to be out of whack! If, as a result of this data, the Fed continues to raise rates, as it says it will, then the oncoming Recession will be deeper and longer than necessary.
LISTEN TO THE PODCAST FOR MORE!
Listen to Josh Barone address the following topics:
A. Ukrainian War with Russia
B. Russia has shifted to selling to EU to Asian Customers
C. US actions in SPR
D. OPEC+ countries reducing crude exports by 2 million barrels per day
E. Global Recession
The Friday, Dec. 2nd Payroll Employment Report was higher than markets anticipated. Some in the economics world are now saying that, as a result, the economy can avoid a recession. Let's see what Bob Barone thinks about that.
**From European sanctions to the deployment of troops in Europe and the retreat of Russian troops from Kherson and protests all over Europe, a lot has been taking place in the past few weeks. Europe is in turmoil!
Listen to the podcast to learn more.**
The only saving grace of the GDP report was its headline +2.6%. As it turns out, Net Exports added 2.8 percentage points, and for the wrong reasons. Excluding Net Exports, the domestic economy’s GDP growth was -0.2%. The Recession continues. While the country still has a large negative balance of trade, it is the change that plays into the growth of GDP. Because of the dollar’s strength, the dollar value of exports rose. Yet, despite that strong buying power, imports fell. Lower imports tell us something about the U.S. consumer.
Final sales to private domestic purchasers were flat (less than 0.1% at an annual rate compared to +0.5% in Q2, +2.1% in Q1, and +2.6% in Q4/21. The chart at the top tells the real story about a weakening U.S. consumer (the black bars – note the lack of such on the right-hand side).
Listen to the podcast to learn more
a. Most states use a copy of labor department’s rules for state run pensions.
i. ERISA(employee retirement income security act of 74) as define the landscape for years.
ii. DOL and ERISA have been seen as best practices.
b. The purposed rule changes put some state at odds with the wording
i. The ESBA rule (at the white house in final review) changes the purview of word fiduciary. Allowing for esg values as primary precursor for investment
c. 3% of US 401ks and less than 1% of retirement assets have esg investments currently.
The Dow Jones fell -550 points in the early going due to the disappointing CPI report. But, by day’s end, it had risen nearly 1400 points from that early morning low and closed up +828 points. That rally appeared to be sparked by technicals: oversold conditions, short covering (the most shorted stocks rose +7%), and a bounce off the 50% reversal of the prior “Bull Market.” In addition, markets were buoyed because the Bank of England (BoE) intervened in the currency market to support the British pound, and because there was a recommendation by staff at the European Central Bank (ECB) to limit rate hikes.
A near 1400-point swing in the Dow Jones Industrial Average doesn’t happen often, but one never sees such volatility in “Bull Markets,” only in “Bears.” So far in 2022 (through October 17) there have been 31 sessions where the Dow Jones rose +400 points or more. Meanwhile the index, itself, is down over -6,000 points. In the 2011-2017 six-year bull market, there were a total of 5 such +400-point sessions. The volatility reminds us that it is premature to call a bottom in stocks when the Fed is still aggressively tightening, and the nasty part of the Recession is still ahead.
Listen to the podcast to learn more.
The Fed did announce the expected 75 basis point (bps) rate hike at their September meeting, but what took markets by surprise was the implied 125 bps rate hikes the new dot-plot showed for year end. (explain what the dot-plot is) On the dot-plot chart, a 125 bps hike showed up in 2022 as the median of the rate estimates of the 13 FOMC members in the estimates from each of those FOMC members. Back in September the median dot peaked at 3.75% in 2023. The new dots now peak above 4.50% in 2023. It is also noteworthy that the dot-plot for 2024 has no consensus. The dots are spread out over nine different rates from the 13 FOMC members in a 2.6% to 4.6% range. A similar situation exists for 2025. This indicates no economic consensus among the FOMC members with those in the high range not seeing the current softening in inflation or the oncoming recession. This occurs despite the fact that their own GDP forecast was pared from +1.7% for 2022 to +0.2% and to +1.2% from +1.7% for 2023.
Listen to learn more
What is ESG?
a. Environmental
i. Publish a carbon or sustainability report
ii. Limits harmful pollutants and chemicals
iii. Seeks to lower greenhouse gas emissions and CO2 footprint
iv. Uses renewable energy sources
v. Reduces waste
b. Social
i. Operates an ethical supply
ii. Avoids overseas labor that may have questionable workplace safety or employ child labor
iii. Supports LGBTQ+ rights and encourages all forms of diversity
iv. Has policies to protect against sexual misconduct
v. Pays Fair (livings) wages
Listen to the podcast and learn!
Housing is an important contributor to GDP. The rapid rise in home prices has been the major issue in housing, until recently. Now, the rapid rise in interest rates has become the major culprit. Housing is now the least affordable it’s been in over 40 years.
Listen to the podcast to learn more.
The rate of inflation was higher than expected in August, suggesting that inflation is far from under control. The FED needs to remain aggressive and we should anticipate more rate hikes.
The cost of debt is likely to increase with things like credit cards, auto financing, and personal loans. Consumers need to prepare for this and get sound advice.
Investors are terrified about where interest rates will land.
While inflation erodes spending power, interest rate hikes make the cost of borrowing more expensive. This confirms the prediction of a deep recession coming soon.
Listen to the podcast for more details.
There is civil unrest in much or Europe and parts of Asia over the high and rising costs of energy.
In the Czech Republic there were 70,000 such protesters on Saturday, September 3rd protesting not only high energy costs, but the cost-of-living crisis.
In Germany, parties on both the left and the right have announced regular Monday protests, again over the high costs for gasoline, energy and food. The first such protest was held on Monday, September 5 in Leipzig.
In Italy, nationwide protests are being organized, again over the high cost of energy. Already there were protests in Perugia on Monday, September 5th.
Listen to the podcast for more!
Q: July’s rate of inflation was 8.5%, down from 9.1%. That’s still really high. You have written that July’s inflation reports had a lot to celebrate. Can you explain?
A: 8.5% is backward looking – it’s what the inflation WAS over the past year. Unfortunately, the news media likes to emphasize the negative. Inflation’s Peak occurred in June.
Looking at the forward indicators, July appears to be the first of several months of good inflation news. As we have written and discussed in previous podcasts, we thought that June would be the peak in inflation for this business cycle, and, after the July inflation data, that looks to be the case. The CPI came out on Wednesday (August 10) flat (0%) on a M/M basis (consensus: +0.2%), bringing the Y/Y rate down to +8.5% (consensus: +8.7%). Core CPI (ex-food and energy) was +0.3% (consensus: +0.5%) with the Y/Y rate falling to +5.9% (consensus: +6.1%).
Listen to the podcast to learn more.
Q: When it comes to investing, your philosophy is “keep it simple.” You don’t like highly complex investments. Can you explain why?
A. Investment Complexity
a. Low Repeatability
b. Warren Buffet if you don’t understand it, don’t buy it
c. The math tends to be in the houses favor
Q: When it comes to investments, you worry about individual investors making their own investment decisions. Tell us why.
B. Balance Sheet Manipulation
a. Earnings can be manipulated
b. Balance Sheet (Financial Engineering)
c. Example Owning vs Leasing
d. Example Future Sales
Q: So with all that goes on in corporate America’s financial statements, what do you look for when investing for your clients?
C. Cash Flow is King
a. Free Cash Flow is sign of health
b. Hard to Manipulate
Q: You have written that the Recession is already here. What does that mean for investors? And, what should they do?
D. Redefining the Gauge of a Recession
a. Reduction in Corporate earnings
b. Reduction in future earnings estimates
c. Why would you want to own a shrinking asset
On Thursday, the government reported real Q2 GDP at -0.9%. There are those who say the weak GDP numbOn Thursday, the government reported real Q2 GDP at -0.9%. There are those who say the weak GDP numbers are misleading – employment is strong, and, if there is a recession, it will be mild. What do you say to that?
• That’s the narrative that Wall Street and the Politicians want you to believe. But it is just another narrative.
o Officially, the NBER dates recession start and end dates, but it often takes them many months to do so – sometimes even after the recession has ended.
o But there has never been two negative GDP quarters in a row without the NBER “officially” designating a recession. So, two negative GDP quarters in a row has become the “rule of thumb” for practitioners while we await official word from the NBER. When the White House or the politicians say we are not in an “official” recession, that’s because the NBER has yet to opine. But, trust me, we are in a recession!
• Walmart just reported – they missed on the top and bottom line because consumers have significantly slowed their purchases of discretionary items
• Target, when they reported a few weeks ago – same story
• Both of these say their inventory levels are too high, so that means they won’t be buying as much from their suppliers (the good news is that their “stuff” is all going to go “on sale”)
• The labor market:
o Payroll vs. Household Survey – explain the difference
o Payroll (headline) positive +372K
Birth/Death model
o Household Survey -315K (negative in 2 of last 3 months)
o Shrinking Labor Force??? Washington Post article 1.5 million of 3 million who retired during Covid now going back to work (inflation 65%, bad equity market (45%))
o Initial Claims – weekly initial filings for unemployment – have risen 90K from their lows in March – looking at this historically, on average, +75K is when recessions occur...ers are misleading – employment is strong, and, if there is a recession, it will be mild. What do you say to that?
• That’s the narrative that Wall Street and the Politicians want you to believe. But it is just another narrative.
o Officially, the NBER dates recession start and end dates, but it often takes them many months to do so – sometimes even after the recession has ended.
o But there has never been two negative GDP quarters in a row without the NBER “officially” designating a recession. So, two negative GDP quarters in a row has become the “rule of thumb” for practitioners while we await official word from the NBER. When the White House or the politicians say we are not in an “official” recession, that’s because the NBER has yet to opine.
But, trust me, we are in a recession!
• Walmart just reported – they missed on the top and bottom line because consumers have significantly slowed their purchases of discretionary items
• Target, when they reported a few weeks ago – same story
• Both of these say their inventory levels are too high, so that means they won’t be buying as much from their suppliers (the good news is that their “stuff” is all going to go “on sale”)
• The labor market:
o Payroll vs. Household Survey – explain the difference
o Payroll (headline) positive +372K
Birth/Death model
o Household Survey -315K (negative in 2 of last 3 months)
o Shrinking Labor Force??? Washington Post article 1.5 million of 3 million who retired during Covid now going back to work (inflation 65%, bad equity market (45%))
o Initial Claims – weekly initial filings for unemployment – have risen 90K from their lows in March – looking at this historically, on average, +75K is when recessions occur...
Q: We know it is always dangerous for someone in your line of work to say “This time is different.” Tell us why this is so, and show us some proof.
A: Ben Bernanke, the Chairman of the Fed during the Great Recession, moved the Fed’s decision-making process from secrecy to transparency. Prior to the Bernanke Fed, the FOMC members never (repeat, never) discussed what they might do regarding monetary policy. Since the Bernanke Fed, nearly every FOMC member openly discusses, not only the recent Fed moves, but their view of upcoming moves.
That transparency that coincided with an increase in volatility in interest rates. And that volatility has a huge impact on the bond market where conservative investors used to go for safety.
The first chart shows the Quarter over Quarter volatility in the 10-Yr U.S. Treasury Note. Note that the volatility was pretty subdued from the late 60s through ’07, then violently erupted with the Fed’s new “transparency.” And it looks to have become worse under the Yellen and now the Powell Fed.
You can also see this clearly if you look at the year over year changes in the 10-Yr Treasury yield.
Q: When you say the Fed became more “transparent,” what exactly do you mean?
A: By “transparency” I mean the Fed’s telling the markets not only their immediate monetary policy actions, but their future intentions. They do this through something called the Summary of Economic Projections (also known as SEP) – the market calls this the “dot-plot.”
I have three charts showing how the market has become volatile because of these “dot-plots.”
In the charts, the yellow dots are the individual projections of the Federal Funds Rate (the rate banks get charged on overnight reserve borrowings which is set by the Fed). There are 16 such dots (the 13 voting members and the 3 alternates). The green line is a plot of the “median” yellow dot.
The first chart is from the Fed’s September 2021 meeting. Note how there was hardly any movement forecast by the dots for 2022, i.e., from 0% to .25%. And even in 2023, the median dot was at 1.00%. Note also that the rate got as high as 2.50% in the “longer term.”
Now let’s look at the December meeting. Note that 2022’s median projection rate has risen to nearly 1%. But that the “terminal” rate remained at 2.50%. This led to some slight volatility.
The volatility really kicked in the March 2022 meeting when the dots shifted significantly higher as inflation became more and more of both an economic and political problem. Note that the 2022 median dot was now nearly 2% rising to 2.75% in 2023 and 2024 before falling back to just under 2.5% in the longer-term (2.5% is considered by most economists to be the “neutral rate” - neither accommodative nor restrictive).
Now let’s look at the last Fed meeting (June 2022). The dots have moved significantly higher once again, now to just under 3.5% at the end of 2022, rising to 3.75% in 2023 before falling back toward the 3.5% level in 2024, and then back to the neutral 2.5% level in the long-term.
All of these gyrations in the dots have cause the volatility. Prior to Fed transparency, there were no dots. The markets only knew what the Fed just did, not what they intended to do in the future. And, as you can see from the dot-plots, in the last four Fed meetings, the dots themselves have been volatile. So, it’s no wonder that interest rates have been volatile too!
Listen to the rest of the podcast.
Q: You have written in your blog that the Recession has already started. But, last week, the employment number convinced some in the media that there is no Recession. Can you comment on that?
A: The media, including some in the economics profession, have concluded that the “economy is strong” and there won’t be a Recession, all based on a single number from Friday’s Payroll Survey. June’s headline number came in at +372K, above the consensus +265K.
First, small businesses aren’t included in the Payroll Survey, so BLS “adds” a number based on “historical experience.” And it is always a large positive number. This is the infamous “birth/death” model for small businesses. For June, that number was over +80K. Thus the number of jobs actually counted was closer to +290K. ADP, America’s largest payroll processor, has been reporting negative numbers for small businesses these past few months. ADP did not report June’s numbers as they are retooling their processes. But, no doubt, June would have been negative again, so +290K is likely high. The reason I can say that with confidence is that the BLS’ sister survey, the Household Survey, showed up as -315K in June (yes minus), and that survey has shown contraction in two of the last three months. There was not a mention in the media about the Household Survey!
Unlike the Payroll Survey, the Household Survey also reports full-time and part-time jobs. Full-time jobs fell-152K, falling now in two of the past three months. Non-agricultural wage and salary employment fell -109K, negative now for three months in a row. Also ignored by the media was the contraction in the workweek (-0.3% to 40.3 hours), and overtime sagged -3.0%, the biggest contraction of the year. The workweek and overtime always contract first before companies lay people off.
The Household Survey also has this funny tendency to lead at cycle turning points:
| Cycle Turning Point | Household Survey | Payroll Survey
| February 2002 | -166K | +91K
| December 2007 | -322K | +108K
| January 2020 | -119K | +339K
Other indicators also point to weakening employment:
· In the both the ISM June Manufacturing Survey and the Services Survey, the employment sub-indexes contracted, the Manufacturing one was in contractionary territory for the second month in a row
· Challenger’s June report showed rising layoff announcements, up 57% M/M and 59% Y/Y. Hiring announcements fell -18% M/M, negative in three of the last four months and -6.5% Y/Y.
· The latest JOLTS report (BLS’ Job Openings and Labor Turnover Survey) corroborates the Challenger report. Job openings fell -427K in June and layoffs rose +77K. This is the report that Fed Chair Jerome Powell watches closely.
· Initial Jobless Claims, too, have risen, now up +62K from their early April lows. From an historical perspective, a rise of +60K has often coincided with the start of a Recession. Continuing Claims (those on unemployment for more than one week) rose to +1.375 million in the latest report (through the week ended July 1) up from +1.305 million less than a month ago.
Nearly every measure of employment shows a weakening trend. Conclusion: In the universe of employment data, it is the Payroll Survey that looks to be the outlier.
Listen to the rest in the podcast
Watch the video on Youtube here: https://youtu.be/93JL4dsOrPg
Real Talk
Q: The daily headline in the media is “Inflation, Inflation, Inflation.” Are there any signs of relief in sight?
1.) Inflation Trends
a. Supply Chain
i. PMI
ii. Los Angeles -# of ships waiting
iii. Discounting by Majors – TGT, WMT, Nike
b. Labor – Unemployment Rate
c. Rents and Housing - new multi-family starts (record)
Q: We hear the term “Stagflation” daily in the business media. What does it mean and is it a threat?
d. Stagflation- Inflation and Recession simultaneously
i. Inflation – as indicated, looks to have peaked
ii. Employment – still looks strong, but new layoff announcements are a concern
iii. Economy - likely entering a recession if not already in one
Q: In the Great Recession, there was a financial crisis – the banks didn’t have enough cash or capital. Is that a threat in today's world?
2.) Bank Liquidity
a. Money Center Banks
i. Reverse Repo usage – High and rising
ii. M2 Money – was high (enabled inflation) but now M2 growth is low and going down
b. Shadow Banks
i. Private Equity marketing – Haven’t seen pricing resets yet, nor have yields gone up with interest rates
Q: Most other central banks are hiking interest rates. The European Central Bank seems to be hesitating. Is this a problem?
3.) European Central Bank
a. Current Rates
i. Inflation - high
ii. Rate hikes – hesitant because some countries are quite weak (Italy, Spain) while others are strong (Germany) – they need different policies (strong argument to go back to a central bank for each country and separ
Q: The consensus economic forecast on Wall Street has switched from “The Economy is Strong” to perhaps we are in for a “Mild Recession.” The Labor market appears to be pretty strong. What’s your view?
A: In today’s world, the media, including the financial media, report with a point of view. They don’t lie, but their point of view makes them selective about what they report. One never gets the whole story. The last two recent employment reports are cases on point.
• Explain what the payroll survey is
• Explain Birth-Death model
• Explain using ADP for small business (ADP is America’s largest payroll processor)
Which do you believe, the automatic add from an analysis that is insensitive to current economic conditions, or from a report that has its finger on the pulse of small businesses?
The net numbers are significantly different from the reported numbers. In addition, in April, the second survey, the Household Survey, reported -353k as the change in employment. Worse, full-time positions were reduced by -651k. There is no way to characterize April’s employment reports as “strong”.
Q: That was April’s Report – was the May report any better?
A: The May employment reports were slightly better than April’s, but in no way “strong”. The Payroll Report was +390, again with an assist of about 100k from the B/D model, so +290 were actually counted. If we use ADP for small business, then, on net, the number was about half of the headline. Nowhere was it mentioned that the Retail sector laid off -61k, that the factory workweek and overtime hours declined. In fact, the overtime hours are down 3 months in a row – the first time this has happened in 7 years. . In addition, those working part-time “for economic reasons” (i.e., business is slow), rose by +349k and is now up in 3 of the last 4 months.
Q: Wow – is there a trend here?
A: Looking at ADP’s data for large, medium and small businesses, the trend is clearly down:
December January March May
+780k +512k +249k +128k
(Slide – ADP Small Business Empl Chgs) For small businesses, which are much more sensitive to changes in the economic environment than are large businesses, ADP’s employment report showed:
April -123k, May -92k, and YTD -278k
Q: As I indicated earlier, the narrative on Wall Street now seems to be that we are in for a “Mild Recession” - what are your thoughts there?
A: The incoming data are showing a marked slowdown in the economy, so the narrative couldn’t still be a “strong” economy. But,” not to worry” the new narrative says, the recession, when it does come sometime next year, will be “mild”. The data that I see says something much much different.
(slide – Corporate Disappointments #1) Let’s start with corporations. A couple weeks ago, WMT and TGT reported sales, earnings, and guidance that disappointed Wall Street analysts. Both said that consumers purchased fewer “discretionary” items; WMT said they spent more on food and less on discretionary items. That’s what one would expect since the price of food has skyrocketed.
Q: Any other Wall Street disappointments?
A: Yes – HD, Kohl’s and most recently MSFT and TSLA. Of note here is that TSLA has announced a 10% workforce reduction. So, it appears that corporate America is already feeling pinched.
Q: Did anything else come out of the recent quarterly Wall Street earnings reports?
A: Yes – inventories are too high. One could have gleaned that from TGT and WMT initial reports that consumers purchased fewer discretionary items. In fact, wholesale inventories have risen +24% Y/Y and retail inventories are up +15% Y/y to a 38-year high.
Here are topics covered in this video:
1) Understanding Fiat Currency
a. Nixion 1971 affectively ends gold standard
b. Fiat a relative floating system
2) YTD Returns Major Currencies
a. Resource countries stronger than Trading countries
3) Debt to Gdp, Trade Deficits, Inflation rates, Real Rates
a. Real Rates matter
b. Basing effect of Inflation
4) Size, Large U.S. treasury holders
a. Reserve Currency Status
b. Economic size matters
5) Forward Projections
a. Global Recession Polices matter
6) Don’t Short the Dollar Long Term (was ok to short with commodities shock)
a. Geopolitical events equate to dollar strength
b. U.S. consumer is still world growth driver
c. U.S. economic size creates dollar MOAT
d. U.S. is closer to Neutral than market realizes
e. China problems are deeper than the market fear
Market volatility in spades this week! On Tuesday, markets were all a-twitter (oops, can’t use that word!) over the large and unexpected rise in April’s retail sales (+0.8%). That sparked a +2.0% rally in the S&P 500. What market commentators neglected to mention was that, when adjusted for price increases, the “real” number was negative (see chart above – red line).
On Tuesday, Fed Chair Powell said that they would continue to tighten financial conditions until “we see inflation coming down,” and that it might not be easy and could come at the expense of a higher unemployment rate. “You’d still have a strong labor market,” he said, “if unemployment were to move up a few ticks. I would say there are a-number-of plausible paths to have a soft, as I said, softish, landing.” Note the reference to higher unemployment and the use of the word “softish” instead of “soft” indicating that the Fed might not be able to tame inflation without issues for the economy.
On Wednesday, then, markets took Powell’s words to heart and the S&P retreated -4.0% and the DJIA fell more than a thousand points (-1,165), clearly now beginning to recognize the reality of the “R” word. Volatility continued on Thursday, with markets fluctuating between gains and losses, finally closing to the downside with the S&P 500 edging ever closer to “Bear Market” territory (more than 20% down from its peak). Then on Friday, more volatility with markets deep in the red most of the day, only to finish near the flat line. At one point, the S&P 500, was down -2.3%. If it had closed there, the fall from the high would have been -20.6%. But, there was a rally into the close, and as the table below shows, it remained in “Correction” at -18.7%.
No Control Over Supply
We note here that the Fed has no control over the supply of goods/services. It only has influence over demand via the jolt that interest rates have on demand and the impact of money printing on the financial markets. The biggest worry that we have, and we suspect similar worries on the part of other market participants, is that supply issues continue to push inflation to higher levels, especially events like total city lockdowns in China, and rising oil and food prices due to real or perceived shortages (Russia).
As a result, in order for the Fed to achieve its 2% inflation target, it would have to impact the 80% of the economy that is not energy or food based. That, according to Wall Street Economist David Rosenberg would require a deep recession (-3% GDP contraction) and a rise in the unemployment rate to 7%. Under those conditions, expect a deep “Bear Market.”
Listen for more!
Welcome to Hidden Truths! Let's talk about Russia and all the propaganda that is going around.
"I find it interesting and it's one of the things I mentioned before. It's disinformation. There's lots of propaganda going around, especially towards Russia. Think about it. You go to the gas station and, the president says, hey, we have to accept higher gas prices because we need to support the Ukrainian people.
But in, in reality, that's not, what's really going on. It's a lot of a false narrative.
On top of that, if you look at a chart of the Russian Ruble, it's the best performing currency against the us dollar. Now I can argue points against that for instance, that there's some manipulation in the currency by the Russian government to prop it up.
They essentially are hitting the U S consumer at the pump and in the grocery store. And I don't think that was their intention when they put the sanctions on, but that's what they're doing.
So maybe the administration changes course now. That's yet to be seen. How about Brazil buying Russian fertilizer? It looks like a lot of countries are still doing business with Russia, like nothing ever happened. Again, we're talking about commodities here."
Listen to the podcast to learn more!
Welcome to hidden truths. We have today your host, Bob Barone. You have stated in your blogs that the four most dangerous words in the economics profession are THIS TIME IS DIFFERENT.
You have stated that when it comes to the economy, this time is almost never different. Yet, you have written that the current interest rates spike is different and will have surprising economic consequences. Can you talk about this today?
Yes. This time is different. Are four dangerous words in the economics profession because the economy is huge and almost never behaves differently than it did the last time the circumstances were similar, but we think this time is different because of one thing. And that is the 📍 federal reserve. The federal reserve is acting really differently than it has in any of the past cycles. So in, in all of the past world war two tightening cycles, and there's been 14 of them, the fed never, I repeat that never publicly announced what its intent was. There was no press statement after the meetings. There was no press conference. There was nothing called the Summary of Economic Projections or what is commonly known as the DOT PLOT. The DOT PLOT is the projections of the FOMC members as to what they think interest rates will be in the future.
And there were no press conferences. In fact, the minutes of the Fed's meeting were never released for years now, they're released within 30 days. So all that is different. The only thing back in the past cycles that the markets knew was what the fed did. Only when the fed did it. Not that the fed told them that they were doing anything.
But participants could look at what was going on in the market and then glean from that, what the fed had done. If we had today, that model, all the market would know was that the fed raised rates once 25 basis points and then recently 50 basis points and would probably be thinking they might be tightening, but the markets would never know that the fed wants to tighten, from 0% fed funds rate to 3% fed funds rate. They wouldn't know that. And so that's different. How does that make a difference, Bob? So in the past, because all the markets knew that the fed was just starting to raise interest rates, they wouldn't know where the fed was going.
But today because the fed has pre-announced where they think they're going to go, the market did immediately, like within 30 days, what the fed had planned to do over a 12 to 18 month span. And so that's made the interest rate cycle occur all at once and has compacted a 12 to 18 month move in interest rates into 30 days.
And that's huge. What are the consequences of this difference? This new forward guidance policy?
The fed has said that they want to have what is called quote on quote a "soft landing". That means we don't get a recession. Now, the fed has a very poor track record when it comes to tightening cycles and soft landings in the 14 tightening cycles in the post World War II period, 11 of them have resulted in 📍 recession.
So that makes their batting average three for 14. What happens is when they start a tightening cycle, on average it takes about a year to 18 months for the recession to occur. So in those 11 recessions that have occurred in the post world war II period, it took between 12 and 18 months to occur. We think that because the markets have pulled forward, that the fed tightening and raised interest rates so much that timing will be compacted.
And so we think that we're going to have a recession probably beginning in 2022. It won't take a year. It'll take much shorter period of time. This is what everybody's wondering right now. Any evidence to date that this will actually occur. Well, the first quarter's&